REG - ITV PLC - ITV Preliminary Results 2016 <Origin Href="QuoteRef">ITV.L</Origin> - Part 3
01/03/2017 07:07
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above, these items
are part of capital consideration reflecting how we structure our transactions. This is consistent with our treatment of
all costs of this type.
Acquisitions - 2012 to 2016 (undiscounted)
2016
UTV UK & Ireland Broadcast TV 100 - - 100 100
Total for 2016 100 - - 100 100
Total for 2012-2015 Content 760 3 328 1,091 2016-2021 1,805
Total 860 3 328 1,191 1,905
2016-2021
1,805
Total
860
3
328
1,191
1,905
* Undiscounted and adjusted for foreign exchange. All future payments are performance related. Of £328 million expected
future payments, £158 million has been recorded on the balance sheet to date.
** Undiscounted and adjusted for foreign exchange, including the initial cash consideration and excluding working capital
adjustments.
The table above sets out the initial consideration payable on our acquisitions, our expected future payments based on our
current view of performance and the total maximum consideration payable which is only payable if exceptional compound
earnings growth is delivered.
We closely monitor the forecast performance of each acquisition and where there has been a change in expectations, we
adjust our view of potential future commitments.
Total expected consideration for all our acquisitions has increased by £128 million since 31 December 2015, primarily as a
result of our acquisition of UTV Limited and future payments denominated in foreign currency. As at 31 December 2016 the
amount recorded on the balance sheet was £158 million of our total expected future payments.
In 2017, around £120 million will be payable on our acquisitions, primarily relating to Talpa Media of which E100 million
is due, subject to audit, in March 2017.
Foreign Exchange Sensitivity
As our Studios business grows internationally, the performance of the business becomes increasingly sensitive to movements
in foreign exchange rates, primarily with respect to the US dollar and euro.
The following table highlights ITV's sensitivity to translation resulting from a 10% appreciation/depreciation in sterling
against the US dollar and euro, assuming all other variables are held constant. An appreciation in Sterling has a negative
effect on revenue and adjusted EBITA, a depreciation has a positive effect.
US Dollar ±50-60 ±8-10
Euro ±25-30 ±3-4
Euro
±25-30
±3-4
Net financing costs
Financing costs directly attributable to loans and bonds (22) (10)
Cash-related net financing costs (3) (3)
Amortisation of bonds (1) -
Adjusted financing costs (26) (13)
Mark-to-market on swaps and foreign exchange (3) (4)
Imputed pension interest (5) (10)
Unrealised foreign exchange and other net financial losses (17) (4)
Net financing costs (51) (31)
Net financing costs
(51)
(31)
Adjusted financing costs increased to £26 million (2015: £13 million) primarily due to 12 months of the seven year E600
million Eurobond issued in September 2015 and new facility fees.
Net financing costs were £20 million higher in 2016 at £51 million (2015: £31 million) primarily due to £17 million
increase in the expected future payments on our acquisition portfolio. These relate to those deals structured with a put
and call option for the remainder of the equity which are not dependent on the seller remaining within the business. The
imputed pension charge decreased as a result of lower interest rates.
Profit before tax
Adjusted profit before tax, after amortisation and impairment of intangibles and financing costs, was broadly flat at £847
million (2015: £843 million). Statutory profit before tax decreased by 14% at £553 million (2015: £641 million), primarily
a result of the exceptional items described below, an increase in net financial losses within net financing costs and a
full 12 months amortisation of the intangible assets acquired in the purchase of Talpa Media, particularly The Voice.
Profit before tax (PBT)
Profit before tax 553 641
Production tax credits 28 23
Exceptional items (net) 164 103
Amortisation and impairment of intangible assets* 77 58
Adjustments to net financing costs 25 18
Adjusted profit before tax 847 843
Adjusted profit before tax
847
843
* In respect of intangible assets arising from business combinations.
Exceptional items
Twelve months to 31 December 2016£m 2015£m
Operating exceptional items:
Acquisition related expenses (131) (88)
Reorganisation and restructuring costs (14) (13)
Pension curtailment (19) -
Other - (8)
(164) (109)
Non-operating exceptional items - 6
Total exceptional items (net) (164) (103)
Total exceptional items in the year were £164 million (2015: £103 million). Operating exceptional items principally relate
to acquisition related expenses which are mainly performance based employment linked consideration, primarily £99 million
for Talpa Media which has delivered in line with its first earnout hurdle and will receive E100 million, subject to audit,
in March 2017. Reorganisation and restructuring costs includes £14 million of restructuring and redundancy costs across the
business in relation to our £25 million overhead cost savings for 2017. The pension curtailment is as a result of the
closure of the defined benefit pension sections of the ITV Pension Scheme to future benefit accrual.
Tax
Adjusted tax charge
The total adjusted tax charge for 2016 was £160 million (2015: £177 million), corresponding to an effective tax rate on
adjusted PBT of 19% (2015: 21%) which is broadly in line with the standard UK corporation tax rate of 20% (2015: 20.25%).
We expect this effective tax rate to be sustainable in the medium term. The adjustments made to reconcile the tax charge
with the adjusted tax charge are the tax effects of the adjustments made to reconcile PBT and adjusted PBT, as discussed
earlier.
Tax charge (100) (139)
Production tax credits (28) (23)
Charge for exceptional items (15) (8)
Charge in respect of amortisation of intangible assets* (11) (4)
Charge in respect of adjustments to net financing costs (6) (3)
Adjusted tax charge (160) (177)
Effective tax rate on adjusted profits 19% 21%
Effective tax rate on adjusted profits
19%
21%
* In respect of intangible assets arising from business combinations. Also reflects the cash tax benefit of tax deductions
for US goodwill.
Cash tax
Cash tax paid in the year was £90 million (2015: £117 million), the majority of which was paid in the UK. The cash tax
figure is net of production tax credits received in the year. The cash tax payable is lower year-on-year because of the
timing of the receipts of tax credits. A reconciliation between the tax charge for the year and the cash tax paid in the
year is shown below.
Tax charge (100) (139)
Temporary differences recognised through deferred tax (13) 29
Prior year adjustments to current tax (10) (9)
Current tax, current year (123) (119)
Phasing of tax payments - UK 5 (1)
Phasing of tax payments - overseas 5 (1)
Production tax credits - timing of receipt 7 (14)
Cash tax impact of allowable UK pension payments 16 18
Cash tax paid (90) (117)
Cash tax paid
(90)
(117)
Tax strategy
ITV is a responsible business, and we take a responsible attitude to tax, recognising that it affects all of our
stakeholders. In order to allow those stakeholders to understand our approach to tax, we have published our Global Tax
Strategy which is available on our corporate website.
www.itvplc.com
We have four key strategic tax objectives:
1. Engage with tax authorities in an open and transparent way in order to minimise uncertainty
2. Pro-actively partner with the business to provide clear, timely, relevant and business focused advice across
all aspects of tax
3. Take an appropriate and balanced approach when considering how to structure tax sensitive transactions
4. Manage ITV's tax risk by operating effective tax governance and understanding our tax control framework with
a view to continuously adjusting our approach to be compliant with our tax obligations
Our tax strategy is aligned with that of the business and its commercial activities, and establishes a clear Group-wide
approach based on openness and transparency in all aspects of tax reporting and compliance, wherever the Company and its
subsidiaries operate. Within our overall governance structure, the governance of tax and tax risk is given a high priority
by the Board and Audit and Risk Committee, including through the operation of the Tax & Treasury Committee. The ITV Global
Tax Strategy as published on the ITV plc website is compliant with the UK tax strategy publication requirement set out in
Part 2 Schedule 19 Finance Act 2016.
EPS - adjusted and statutory
Overall, adjusted profit after tax was up 3% at £687 million (2015: £666 million). After non-controlling interests of £4
million (2015: £7 million), adjusted basic earnings per share was 17.0p (2015: 16.5p), up 3% which is higher than the
growth in adjusted EBITA of 2% due to a decrease in our adjusted effective tax rate in the year to 19% (2015: 21%). The
weighted average number of shares was broadly in line at 4,010 million (2015: 4,006 million). Diluted adjusted EPS in 2016
was 17.0p (2015: 16.3p) reflecting a weighted average diluted number of shares of 4,029 (2015: 4,035).
Statutory EPS declined by 10% to 11.2p (2015: 12.4p) primarily as a result of higher employment linked consideration
(largely Talpa Media), which is included within reported EPS but as in prior years, is excluded from adjusted EPS as in our
view these costs are part of capital consideration. In addition there were higher restructuring costs associated with our
2017 cost savings and higher amortisation of acquired intangibles assets from a full 12 months of Talpa Media.
A full reconciliation between statutory and adjusted EPS is included within the Alternative Performance Measures section.
Dividend per share
In 2014, the Board made a commitment to grow the full year ordinary dividend by at least 20% per annum to 2016 to achieve a
more normal dividend cover of between 2.0 and 2.5x adjusted earnings per share. In line with this policy and reflecting
ITV's good performance in 2016, the Board is proposing a final dividend of 4.8p which equates to a full year dividend of
7.2p, which gives a cover of 2.4x. We have delivered average annual growth of 27% in the ordinary dividend over the last
three years.
Reflecting ITV's strong cash generation and the Board's confidence in the business, the Board is proposing a special
dividend of 5p per share worth just over £200 million, bringing the total special dividends since 2012 to almost £1.2
billion.
Looking ahead the Board is committed to a long-term sustainable dividend policy. Ordinary dividends will grow broadly in
line with earnings, targeting dividend cover of around 2x adjusted earnings per share over the medium term. ITV has £1.7
billion of distributable reserves at 31st December 2016 available immediately to support the dividend policy.
Cash generation
Profit to cash conversion
Adjusted EBITA 885 865
Working capital movement (20) (72)
Depreciation 31 27
Share-based compensation and pension service costs 10 17
Acquisition of property, plant and equipment and intangible assets (44) (49)
Adjusted cash flow 862 788
Profit to cash ratio 97% 91%
Profit to cash ratio
97%
91%
Note: Except where disclosed, management views the acquisition of operating property, plant and equipment and intangibles
as necessary ongoing investment in the business.
ITV continues to be highly cash generative reflecting our ongoing tight management of working capital balances and our
disciplined approach to cash and costs. This is particularly important when there is wider political and economic
uncertainty and places us in a good position to continue to invest across the business and deliver sustainable returns to
our shareholders.
In the year we generated £862 million (2015: £788 million) of operational cash from £885 million (2015: £865 million) of
adjusted EBITA, which equates to a strong profit to cash ratio of 97% (2015: 91%).
To facilitate our working capital management, we have agreed a £100 million non-recourse receivables purchase agreement
(free of financial covenants) which gives us the flexibility to access additional liquidity when required. At the 31st
December, £35 million of receivables were sold under the purchase agreement.
Free cash flow
Adjusted cash flow 862 788
Net interest paid (20) (9)
Adjusted cash tax (126) (127)
Pension funding (80) (90)
Free cash flow 636 562
Free cash flow
636
562
Note: Adjusted cash tax of £126 million is total cash tax paid of £90 million excluding receipt of production tax credits,
which are included within adjusted cashflow from operations, as these production tax credits relate directly to the
production of programmes.
After payments for interest, cash tax and pension funding, our free cash flow remained strong in the period, up 13% to £636
million (2015: £562 million).
Overall, after dividends (ordinary and special), acquisition related costs, debt repayments and strategic investments,
particularly into 'digital first' businesses, we ended the year with net debt of £637 million, compared to net debt of £796
million at 30 June 2016 and net debt of £319 million at 31 December 2015. Our cash generation was weighted towards the
second half of 2016 due to the payment of the special dividend and the acquisition of UTV, both of which were paid in the
first half of 2016.
Funding and liquidity
Debt structure and liquidity
Our balance sheet strength, together with our strong free cash flow, enables us to continue to invest in opportunities to
grow the business and make returns to our shareholders. To preserve our financial flexibility we have put a number of new
facilities in place. We have increased our Revolving Credit Facility (RCF) from £525 million to £630 million and extended
it for a further five years to 2021 (with the option to extend to 2023). We have also increased our bilateral financing
facility from £175 million to £300 million, which is free of financial covenants. This, along with our two bilateral loans
which total £250 million and mature in 2017 (but may be extended until 2018 at ITV's option), provides us with sufficient
liquidity to meet the requirements of the business in the medium to long-term. The RCF and bilaterals have the usual
financial covenants for these type of financing which are detailed in note 4. Of the total £1,180 million facilities in
place, £250 million was drawn down at 31 December 2016.
Our policy is to maintain at least £250 million of available liquidity at any point.
Leverage
Our objective is to run an efficient balance sheet. We believe maintaining leverage below 1.5x reported net debt to
adjusted EBITDA will optimise our cost of capital. At 31 December 2016, reported net debt to adjusted EBITDA was 0.7x
(2015: 0.4x). Our priority is to invest to drive organic growth and make acquisitions in line with our strategic priorities
as we find the right opportunities to do so. We will balance this investment with attractive returns to shareholders where
we have surplus capital.
We also look at an adjusted measure of net debt, taking into consideration all of our other debt-like commitments including
the expected, undiscounted contingent payments on acquisitions, the pension deficit under IAS 19 net of gilts held as
security against a proportion of those liabilities and the undiscounted operating lease commitments which mainly relate to
broadcast transmission contracts and property. This adjusted leverage measure better reflects how the credit rating
agencies look at our balance sheet. At 31 December 2016 adjusted net debt was £1,637 million (31 December 2015: £1,144
million) and adjusted net debt to adjusted EBITDA was 1.8x (31 December 2015: 1.3x).
Financing
We are financed using debt instruments and facilities with a range of maturities. In December 2016 we issued a new E500
million Eurobond at a coupon of 2.00% which was swapped into sterling using a number of cross currency interest rate swaps.
The net sterling interest rate payable on these swaps is c. 3.5%. The net sterling proceeds from the bond of £425 million
were primarily used to refinance existing debt, including the £161 million bond that matured in January 2017, and will be
used to pay the first tranche of the Talpa Media earnout due in 2017.
Net debt
Gross cash 561 294
Gross debt (1,198) (613)
Net debt (637) (319)
Net debt
(637)
(319)
Borrowings at 31 December 2016 were repayable as follows:
£161 million Eurobond 161 Jan 2017
£100 million Bilateral Loan 100 Jun 2017/2018
E600 million Eurobond 508 Sep 2022
E500 million Eurobond* 425 Dec 2023
Finance leases 4 Various
Total debt repayable on maturity** 1,198
Various
Total debt repayable on maturity**
1,198
* Net of £2 million cross currency swaps.
** In addition to above we have a £150 million bilateral loan which was drawn down at 31 December but was
offset by deposit on account.
At 31st December, the £630 million RCF was undrawn.
Ratings
We are rated investment grade by two ratings agencies: BBB- (positive outlook) by Standard and Poor's and Baa3 (stable
outlook) by Moody's Investor Services. The factors that are taken into account in assessing our credit rating include our
degree of operational gearing, exposure to the economic cycle, as well as business and geographical diversity. Continuing
to execute our strategy will strengthen our position against all these metrics.
Foreign exchange
As ITV continues to grow internationally, we are increasingly exposed to foreign exchange on our overseas operations. We do
not hedge our exposure to revenues and profits generated overseas, as this is seen as an inherent risk. We may elect to
hedge our overseas net assets, where material. To date we have hedged a significant portion of the euro net assets arising
from the Talpa Media acquisition.
ITV is also exposed to foreign exchange risk on transactions we undertake in a foreign currency. Our policy is to hedge a
portion of any transaction that is either a firm commitment for up to five years forward or a highly probable forecast for
up to 18 months, depending on the level of certainty we have on the final size of the transaction.
Finally, ITV is exposed to foreign exchange risk on the retranslation of foreign currency loans and deposits. Our policy is
to hedge such exposures where there is an expectation that any changes in the value of these items will result in a
realised cash movement over the short to medium term.
The foreign exchange and interest rate hedging strategy is discussed and approved by the ITV plc Board and implemented by
our internal Tax and Treasury Committee who oversee governance and approval of Tax and Treasury related policies and
procedures within the business.
Pensions
The net pension deficit for the defined benefit schemes at 31 December 2016 was £328 million (31 December 2015: £176
million excluding UTV pension scheme). The increase reflects a rise in pension liabilities following a significant decrease
in corporate bond yields along with an increase in market expectations of long-term inflation. The overall increase in
liabilities has more than offset the deficit funding contribution and increase in asset values. The net pension deficit
includes £39 million of gilts which are held by the Group as security for future unfunded pension payments of four former
Granada executives. A full reconciliation is included within Note 3.7.
Following the acquisition of UTV Limited in February 2016, the assets and liabilities of the UTV defined benefit pension
scheme (which is in a surplus of £1 million) are included within the Group net pension deficit at 31 December 2016.
Actuarial valuation
The last actuarial valuation was undertaken in 2014. On the basis adopted by the Trustee, the combined deficits as at 1
January 2014 amounted to £540 million.
The Trustee is in the process of undertaking a full actuarial valuation of all sections of the Scheme as at 1 January 2017
which we expect to agree in late 2017 or early 2018.
Closure to future accrual
In December 2016, following a member consultation, the Group decided to close the defined benefit sections of the ITV
Scheme to future benefit accrual with effect from 28 February 2017. The benefits of these members will become subject to
statutory increases from the date of closure until retirement, rather than the capped pensionable salary that previously
applied. This change has resulted in a one-off £19 million non-cash curtailment charge which is included within
exceptionals.
Deficit funding contributions
The Group continues to make deficit funding contributions in line with the most recent valuation in order to eliminate the
deficits in each section.
The total deficit funding contribution for 2016 was £80 million, a £10 million reduction on 2015. This contribution is
expected to remain at £80 million in 2017. Further details are included within Note 3.7.
Subsequent events
Eurobond repayment: On 5 January 2017 ITV repaid the £161 million Eurobond as it matured.
Gurney Productions LLC: On 6 February 2017, the Group exercised the call option to acquire the remaining 38.5% interest of
Gurney Productions LLC.
London Property Strategy: On 21 February 2017, ITV announced that following an extensive review of its London property
requirements, it intends to seek planning permission to redevelop its South Bank site and build a new London home. The
teams currently located in the South Bank site will be relocated to various sites during the redevelopment period. As a
result of the review, ITV is also proposing to close The London Studios (TLS) business and use studio capacity in the
external market to meet our future business needs.
Acquisitions: On 28 February 2017, we announced the acquisition of 65.05% of Tetra Media Studios SAS, the French production
business.
Ian Griffiths
Group Finance Director
Risks and Uncertainties
As a producer and broadcaster ITV's business carries a number of risks which we manage through our risk management
framework.
This risk management framework sets out our processes for identifying, reviewing and managing our risks and is regularly
assessed and adapted as the Company, industry and macro environment evolves. Our continuing success is dependent on how
well we understand and manage our risks.
Our approach, which is consistent with previous years, covers risks at all levels of the organisation:
• Principal risks:
- High Impact, Low Likelihood (HILL) risks - of low inherent likelihood but where there would be major consequences were
the risk to materialise
- Strategic risks - would impact the successful execution of the strategy
• Operational or process level risks
- embedded into everyday activity within the organisation
Risks are primarily controlled through the risk management process. The Board has carried out a robust assessment of the
Principal risks facing the Company and details of these are set on out on the following pages. Mitigating actions have been
identified for all of the Principal risks. Each Strategic risk has been mapped to at least one of the three key Strategic
Priorities and, where possible, assigned key risk indicators. Where appropriate, the key risk indicators are aligned to our
key performance indicators (KPIs). All Principal risks are owned by at least one member of the Management Board.
In line with our Risk Management Framework, the Management and Divisional Boards have reviewed ITV's Principal risks and
uncertainties. While these potential risks are predominately unchanged, the Board feels the potential risk of a sustained
cyber/viral attack should be viewed as a HILL risk rather than a Strategic risk. The Board believes that this better
reflects the nature of this risk because media companies in particular have faced increased frequency and sophistication of
cyber-attacks.
Risk appetite
The Board is responsible for setting the level of risk the Company is willing to take in line with our strategy. There are
clear approvals frameworks in place and we continue to develop our approach to ensure that the business understands the
Board's risk appetite and ensure they understand tolerance levels and track the key risk indicators to help manage each
risk.
Three lines of defence
We continue to enhance our three lines of defence model and develop our approach to managing risks. The business divisions
own their risks and the shared service functions support them in managing the risks. Internal Audit provide assurance as to
the effectiveness of the internal control and risk management systems. In areas which face day to day operational risk, we
are continuing to develop our three lines of defence model and to move our approach to risk away from a rules and process
driven system to a cultural people driven solution which we believe encourages a focus on prevention rather than reaction
to failure. A new Leading Risk training programme is now in place for ITV Studios production management which will continue
to be developed and introduced to other areas of the business.
Risk culture
Throughout the year we have continued to focus on and strengthen our risk culture. The Operational Risk Steering Group
considers ethical behaviours, governance and compliance with our Code of Conduct. We aim to have an open communication
culture where information is shared and issues are escalated as appropriate.
Assurance
Internal Audit provide objective assurance as to the effectiveness of the Group's systems of internal control and risk
management, reporting to the Management Board, Divisional boards and the Audit and Risk Committee.
The internal audit plan is driven from ITV's risk management framework. Internal Audit review the auditable elements of the
HILL, Strategic and operational risks and this review informs the areas and topics that Internal Audit focus on.
Risk management framework
Our ongoing process for risk identification, review and management is set out below.
Board
• Sets strategic objectives
• Identifies and evaluates Principal risks and uncertainties
• Sets our strategy on risk and establishes tolerance levels and risk appetite
• Ensures a robust and appropriate risk management framework is in place
• Continually monitors the risk management and internal control systems
Management and Divisional Boards
With support from the Divisional Boards the Management Board has responsibility for:
• the development and operation of the risk management framework and for the operation of our systems of internal control.
This includes:
- risk identification and assessment and establishing controls and procedures to monitor and mitigate risks.
- assessment and review of financial controls, policies and procedures to ensure risks are identified and the processes
and procedures are in accordance with and aligned to the strategy.
- reviewing and monitoring the effectiveness of internal controls and putting in place remedial plans where controls are
weak or there are opportunities for improvement. Serious control weakness (if any) is reported to the Board and action
taken as appropriate.
• routinely reviewing and challenging risks and mitigations.
Operational Risk Steering Group
The Operational Risk Steering Group has responsibility for:
• considering and setting actions for pan ITV risks and for ongoing monitoring of those actions.
• reviewing incident reports and other statistics.
• reviewing policies and processes to ensure they remain fit for purpose.
• identifying and reporting emerging risks.
• identifying and resolving issues.
Risk areas in scope of the group and sub committees that deal with specific risk areas are set out in the governance
framework.
The Chairman of the Audit and Risk Committee attends meetings of the Operational Risk Steering Group periodically.
Audit and Risk Committee
The Audit and Risk Committee has responsibility for:
• overseeing and advising the Board on strategic risk exposures and future mitigation strategy.
• reviewing internal controls and their effectiveness.
• reviewing the effectiveness of the risk management framework.
• conducting in depth reviews of high risk business areas or processes.
• reviewing internal audit actions and management responsiveness to the findings.
Details of risk reviews undertaken during the year are set out in the Audit and Risk Committee report.
Operation and Assurance - three lines of defence
1 Business divisions
The business divisions own the management of their risks and are responsible for:
• identifying and reporting local risks.
• maintaining risk registers and business continuity plans where appropriate.
• reviewing and implementing mitigating actions
2 Shared service functions
Support the business divisions in managing risks.
3 Business divisions
Provide assurance as to the effectiveness of the internal control and risk management systems.
High Impact, Low Likelihood Risks (HILL)
Financial
Potential Risk
ITV loses its credit status or lines of funding with existing lenders or there is an event that impacts financial
arrangements/availability of credit.
Key Drivers
• There is a repeat of the 2008/09 financial crisis as a result of a major bank collapse, or there is a similar financial
outcome as a result of an unexpected world event.
Mitigating Factors and Risk Direction
• The business is cash generative and working capital management remains a key focus.
• ITV has a balance sheet policy to maintain adjusted net debt below 1.5x adjusted EBITDA and have available liquidity
headroom of at least £250 million.
• ITV has a £630 million Revolving Credit Facility with a number of core relationship banks and £250 million of financial
covenant free facilities.
• The relatively low levels of ITV debt and our two investment grade ratings mean ITV continues to have good access to
both bank and bond financing.
Risk stayed the same
Potential Risk
There is a major collapse in investment values or a material change in liabilities leading to an impact on the pension
scheme deficit.
Key Drivers
• As a result of macroeconomic changes there can be material movements in the Group's defined benefit pension scheme.
• For example if the Bank of England announces further Quantitative Easing this may change gilt yields and corporate bonds
rates, increasing the scheme's liabilities.
• Or if there is an unexpected world event that impacts property values and/or impacts share prices.
Mitigating Factors and Risk Direction
• There is regular communication between ITV and the pension trustees.
• The pension scheme's assets are invested in a diversified portfolio, with a significant amount of the fund held in
bonds.
• ITV has worked with the pension trustees to limit the potential deficit by a series of asset backed arrangements.
Further, it has taken some mortality risk out of the scheme with a longevity swap and hedged a portion of inflation and
interest rate variability.
Risk stayed the same
Operational
Potential Risk
A significant event removes a number of the key management team from the business on a long-term or permanent basis.
Key Drivers
• In the ordinary course of business activities there will be times when the Management Board are in one location or
travel together as a group.
Mitigating Factors and Risk Direction
• There is a business resilience plan in place which includes succession plans or nominated replacements for all key
positions within the Company.
Risk stayed the same
Potential Risk
There is a sustained cyber/viral attack causing prolonged system denial or major reputational damage, for example the
ability to broadcast our channels or the availability of ITV Hub or ITV loses a significant volume of personal or sensitive
data.
Key Drivers
• With increasingly sophisticated technology, the risk of a cyber/viral attack has increased across the world.
• We are higher risk as a result of operating in a public environment.
Mitigating Factors and Risk Direction
• We continue to improve our ability to monitor, detect and respond to cyber threats internally and through partnerships
with specialist security organisations.
• Mandatory online training modules, awareness campaigns and simplified information security policies have been
implemented for employees.
• There are disaster recovery and incident management plans in place for high-risk areas of the business to help deliver a
rapid and flexible response. These are kept under review by the Audit and Risk Committee.
Increased risk
Reputation
Potential Risk
An event with public interest that causes significant reputational and brand damage.
Key Drivers
• Through the Broadcasting and Studios businesses, the Company operates in a public environment.
Mitigating Factors and Risk Direction
• ITV has a crisis management policy and process in place and is increasing emphasis on its development and application.
Risk stayed the same
Potential Risk
There is a major health and safety incident that results in a significant loss of human life.
Key Drivers
• As the Company expands this may result in an increase in production hours, and the Company could produce certain types
of programming which have higher inherent risks.
Mitigating Factors and Risk Direction
• ITV has a central health and safety team and health and safety policies and procedures are in place, with appropriate
training for employees where required. As we continue to expand internationally these will be kept under review.
• Regular inspections are undertaken at all sites alongside a programme of appropriate health and safety audits.
Risk stayed the same
Potential Risk
A major incident results in ITV being unable to continue with scheduled broadcasting for a sustained period.
Key Drivers
• ITV's broadcast technology chain is complex and risk can materialise within ITV or with third parties responsible for
servicing the broadcast supply chain.
Mitigating Factors and Risk Direction
• A risk register of broadcast operations, including key outsourced functions, is in place and reviewed on a regular
basis.
• Major incident scenario testing takes place bi-annually.
• An incident management process has been agreed and full disaster recovery plans are in place.
Risk stayed the same
Potential Risk
There is a significant or unexpected change in regulation or legislation.
Key Drivers
• ITV could be affected if there is a change in UK media or intellectual property regulation or legislation; for example
if there is a change in advertising restrictions in key categories.
• Highlighted below are key risks as a result of European Union membership referendum.
Mitigating Factors and Risk Direction
• ITV regularly communicates with appropriate groups and its legal panel and Ofcom to monitor potential policy, legal and
regulatory developments.
Increased risk
Impact of exiting the European Union
As a result of UK European Union membership referendum, any macro uncertainty may have a knock on impact to the overall
health of the UK television advertising market.
Further there could be wider changes in regulation or legislation within the markets in which we operate. While the
potential changes and the impact of any such changes will remain unknown for a while, ITV could, for example, be affected
by changes to:
• EU broadcasting legislation and/or rules around EU market access, for example potential barriers against UK companies
selling programming to, or investing in, EU companies;
• indirect taxation, direct taxation or transfer pricing regulation;
• restrictions to free movement of our staff.
In addition, given the reciprocal nature of worldwide trade deals, there could also be knock on changes to UK legislation
affecting broadcasting and intellectual property laws. For example, there may be pressure to weaken obligations to purchase
original content made in the UK or to broaden exceptions from intellectual property protection.
The likelihood or extent of any impact is currently unknown but going forward we will closely monitor and evaluate any
potential areas of risk.
Strategic risks
The Market
Potential Risk
There is a major decline in advertising revenues and ITV does not build sufficient non-NAR revenue streams to mitigate the
financial impact of this decline.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• The current economic environment is uncertain which may impact demand for advertising. However ITV has made significant
progress in rebalancing the business and 53% of our total revenue comes from sources other than TV spot advertising.
Mitigating Factors and Risk Direction
• Growing non-NAR in areas such as ITV Studios and Online, Pay & Interactive, remains a key part of the strategy.
• ITV continues to focus on cash and costs, ensuring the Company has adequate financial liquidity and balance sheet
flexibility to continue to invest.
Risk stayed the same
Potential Risk
The television market moves significantly towards pay television as a preferred model, negatively impacting ITV's
free-to-air revenue.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Build a global pay and distribution business
Key Drivers
• The current platform mix between free-to-air and linear pay television is around 50% each and has remained at this level
over recent years.
Mitigating Factors and Risk Direction
• ITV continues to support free platforms, including YouView, to keep free-to-air strong.
• ITV looks at and evaluates the opportunities for expanding its existing pay services and other pay offerings.
• ITV explores other platforms to understand viewing habits and what people are prepared to pay for.
Risk stayed the same
Potential Risk
A faster than expected shift to VOD or other new technologies, such as internet enabled TVs or online only services, causes
a sustained loss of advertising revenue.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• The way people are consuming television is changing and viewers are spending more time watching online. However it
remains a small percentage of total viewing at around 7% (2015 internal estimates).
Mitigating Factors and Risk Direction
• The business continues to develop the ITV Hub VOD services, maximise the distribution of the ITV Hub and grow its VOD
advertising business.
• ITV monitors the market for new technology and where appropriate explores how ITV can participate.
• ITV continues to invest around £1 billion in its programme budget.
Risk stayed the same
Organisation, Structure and Processes
Potential Risk
ITV fails to evolve its organisational structure and culture to ensure that it is capable of delivering continued growth
from new businesses or revenue streams and fails to attract, develop and retain key creative, commercial and management
talent with the skills required for the ongoing business.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• Employing the best creative, commercial and management talent is key to our success.
• Failing to create the right culture to attract and retain this talent increases this risk.
• Employee engagement is critical and we continue to monitor it through our employee survey. This once again showed very
high engagement at 90%, up on the previous year (2015: 89%).
Mitigating Factors and Risk Direction
• ITV constantly reassesses the business to create a fit-for-purpose organisation.
• Strategic focus on working across the business to embed and strengthen the culture of 'One ITV' way of working.
• ITV invests in training and development for all key colleagues in the business.
• Succession plans are in place for all key positions within the Company.
Risk stayed the same
Potential Risk
There is significant loss of programme rights or ITV fails to identify and obtain the optimal rights packages.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• There is increased competition for high-quality programme rights as broadcasters and platform owners demand brand
defining content.
• As an integrated producer broadcaster, ITV produces a significant proportion of the broadcast schedule itself. In 2016
this increased to 63% of the main channel's original commissions.
• ITV maintains good relationships with independent producers to ensure it has opportunities to acquire quality content.
Mitigating Factors and Risk Direction
• ITV is focused on both protecting and exploiting existing rights and ensuring that future rights generated accrue to
ITV.
• ITV has a detailed model to evaluate the value of third-party rights to ensure it only buys rights that make economic
sense.
• ITV invests in creating and owning quality content through ITV Studios.
Risk stayed the same
Potential Risk
ITV fails to create and own a sufficient number of hit programmes/formats across its international portfolio of content
companies.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• Our ability to create and own hit programmes depends on the quality of our content business.
• ITV is the largest commercial producer in the UK and a leading independent non-scripted producer in the US and Europe.
Mitigating Factors and Risk Direction
• ITV maximises opportunities for ITV Studios to create successful shows by investing in the creative pipeline and
focusing on programmes and genres that can return and travel internationally, i.e. drama, entertainment and factual
entertainment, as evidenced by our increased investment in scripted content.
• ITV is focused on hiring and retaining the right key creative talent.
Risk stayed the same
Potential Risk
ITV fails to properly resource, financially, creatively and operationally, the new growth businesses, in particular online
and international content.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• Our strategy is clear and we remain focused on delivering against our three strategic priorities in the areas where we
can deliver most growth as we continue to rebalance the business.
Mitigating Factors and Risk Direction
• Talent management plans have been developed and reviewed to ensure adequate succession planning across ITV.
• ITV continues to embed and strengthen the culture of 'One ITV' way of working.
• Lessons from recent investments are captured through post-acquisition reviews.
Risk stayed the same
Potential Risk
ITV remains heavily reliant on legacy systems, which could potentially restrict the ability to grow the business. These
systems and processes may not be appropriate for non-advertising revenue or international growth.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• Our system requirements change as we continue to rebalance the business, grow new revenue streams and become
increasingly international.
Mitigating Factors and Risk Direction
• System requirements are kept under review with business growth and system modernisation projects implemented as
appropriate.
• A modernisation plan is in place for the legacy systems which remains under constant review and development to ensure
technology systems meet the needs of the business.
• Cyber risk mitigations in relation to all of our systems.
• This is kept under review by the Audit and Risk Committee.
Risk stayed the same
Technology
Potential Risk
A significant high-profile incident or series of events e.g. a system failure, a technology issue, or a major regulatory
breach that causes significant reputational and/or commercial damage.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• As a broadcaster ITV has significant prominence and therefore is exposed to the risk of a high-profile incident.
Mitigating Factors and Risk Direction
• ITV has ongoing modernisation projects to ensure transmission and distribution technologies are fit-for-purpose.
• There are disaster recovery and incident management plans in place in high risk areas of the business to help deliver a
rapid and flexible response.
• ITV proactively manages its broadcast chain partners and suppliers to ensure the risk of incidents and regulatory breach
is minimised.
Risk stayed the same
Potential Risk
ITV fails to ensure appropriate business continuity planning and resilience within its core systems, processes, platforms
and technology infrastructure.
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Key Drivers
• The key to business continuity is having an appropriate risk management framework and the right plans and procedures in
place. This is is taken very seriously at ITV and the adequacy and robustness of our plans are reviewed and tested.
Mitigating Factors and Risk Direction
• Disaster recovery plans are in place with tests conducted periodically on business critical systems.
Risk stayed the same
Viability Statement
Annually the Board assesses ITV's prospects and risks at its June strategy day. Amongst other topics, the Board reviews the
five year financial plan which is based on our Strategic Priorities.
However, in its assessment of viability the Board reviewed the planning horizon and is of the view that a three-year period
to 31 December 2019 continues to be most appropriate. The factors the Board considered in adopting this timeframe are as
follows:
• Visibility over ITV's broadcast advertising business is relatively short term, as advertising remains cyclical and
closely linked to UK economic growth;
• The commissioning process and life cycle of programming gives ITV Studios division more medium-term outlook. However,
while non-returning brands are replaced with new commissions, over time there is less visibility as programmes can
experience changes in viewer demand or come to a natural expiration;
• Technology in the media industry continues to change the demand for content and also how it is consumed;
• Pension funding, which is one of ITV's key funding obligations, is also agreed triennially with the Trustees of the
pension scheme; and
• ITV's business model does not necessitate investment in large capital projects that would require a longer-term planning
horizon.
When considering the longer term viability of ITV, the Board has reviewed each of ITV's Principal risks and uncertainties
and, taking into account current operational and financial performance, has in particular analysed the impact of:
• Broadcast & Online experiencing a significant and sharp downturn, similar to the 2008/09 financial crisis, with regards
to advertising revenues, but in this case with no immediate recovery. This scenario is cautious as recessions in the
advertising market have historically not exceeded a two-year period and have recovered following the downturn;
• A number of key programme brands within ITV Studios are not recommissioned. While the scheduling decisions of
commissioners are made in advance, a number of key shows could come to an end at the same time; and
• A significant change in ITV's pension funding obligations, following the triennial valuation in 2017 resulting in
doubling the deficit funding payments.
The review involved flexing the underlying strategic forecast for the above impacts, both individually and concurrently and
no specific mitigations were assumed. The underlying strategic forecast assumed: business as usual capital spending, the
ongoing availability of the financing facilities (as ITV remains within the covenants, current bank facilities have more
than three years maturity remaining and all bond repayments due in this period have been refinanced); and that the Group
maintains the stated dividend policy.
Based on the results of this review, the Board has a reasonable expectation that ITV will be able to continue in operation
and meet its liabilities as they fall due over the three-year period ending 31 December 2019. The assessment has been made
with reference to ITV's strategy and the current position and prospects.
Directors' responsibilities
The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company's and the Group's position and performance,
business model and strategy.
Each of the Directors, whose names and functions are listed on pages 60 and 61 of the 2016 ITV plc Annual Report, confirm
that, to the best of their knowledge:
• the Group accounts, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of
the assets, liabilities, financial position and profit of the Group; and
• the Directors' Report includes a fair review of the development and performance of the business and the position of the
Group, together with a description of the Principal risks and uncertainties that it faces.
In accordance with Section 418 of the Companies Act 2006, the Directors confirm that, so far as they are each aware, there
is no relevant audit information of which the Company's auditor is unaware; and each Director has taken all steps that they
ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that
the Company's auditor is aware of that information.
The Board has conducted a review of the effectiveness of the Group's systems of internal controls for the year ended
31 December 2016. In the opinion of the Board, the Company has complied with the internal control requirements of the UK
Corporate Governance Code throughout the year, maintaining an ongoing process for identifying, evaluating, and minimising
risk.
The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under
that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and
applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting
Standards, including FRS 101 Reduced Disclosure Framework.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In
preparing each of the Group and parent company financial statements, the Directors are required:
• to select suitable accounting policies and then apply them consistently;
• to make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, to state whether they have been prepared in accordance with IFRSs as adopted by the
EU;
• for the parent company financial statements, state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the parent company financial statements; and
• to prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and
the parent company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent
company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and
enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility
for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud
and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors'
Report, Annual Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
By order of the Board
Andrew Garard
Company Secretary,
1 March 2017
ITV plc
Registered number 4967001
Financial Statements
Independent Auditor's Report to the Members of ITV plc Only
Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of ITV plc for the year ended 31 December 2016 set out on pages 110 to 188 of the
Annual Report. In our opinion:
• the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at
31 December 2016 and of the group's profit for the year then ended;
• the group financial statements have been properly prepared in accordance with International Financial Reporting
Standards as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with UK Accounting Standards,
including FRS 101 Reduced Disclosure Framework; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as
regards the group financial statements, Article 4 of the IAS Regulation.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement, in decreasing order
of audit significance, that had the greatest effect on our audit, were as follows:
The risk Our response
Net Advertising Revenue ('NAR') £1,672 million (2015: £1,719 million) Risk vs 2015: ◄ ►,
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